EXERCISE 5-12 (30 MINUTES)

3. The scattergraph is shown below. The change in equipment lease cost from a fixed fee to an hourly rate causes the slope of the regression line to be steeper above 19,500 DLH, and to be discontinuous between the fixed fee and hourly rate points. There are in essence two relevant ranges—one below 19,500 DLH and one above 19,500 DLH. Within each relevant range, a single straight line provides a reasonable approximation to cost behavior.

Y

$100,000

$95,000

$90,000

$85,000

$80,000

$75,000

O

v

er

head C

o

s

ts

$70,000

$65,000

$60,000

X